US pension plans, endowment funds and other institutional investors are far less likely than their foreign counterparts to actively hedge against currency fluctuations, according to a new survey in the latest issue of aiCIO magazine.

"The comparatively relaxed attitude of US institutional investors toward currency risk raises a number of intriguing questions," said aiCIO editor-in-chief Kip McDaniel. "For starters, it is not clear if some US capital owners are behaving irresponsibly or if foreign institutions are compromising their long-term returns through excessive caution." 

The survey accepted responses from 100 institutional asset owners, including 74 based in the US and 26 based overseas. Nearly half of the respondents individually oversee assets in excess of $5 billion. Among the survey's results: 

• 72% of non-US funds hedge their foreign exchange (FX) exposure versus only 28% of US funds. Nevertheless, a nearly equal percentage of US and foreign institutional investors consider currency exposure to be a "zero-sum game." 
• 67% of non-US funds have explicit language in their investment policy statements regarding currency exposure, in contrast to only 37% of US funds. 
• Non-US funds are four times more likely than US funds to invest in currency as an asset class.
• US funds were three times more likely than foreign funds to consider currency exposure "not very important" to the wellbeing of their portfolio.

McDaniel offered a number of reasons why US institutions may be less prone than foreign funds to hedge FX risk.  As long as the US dollar remains the world's reserve currency, it may be less important for US funds – with liabilities in US dollars – to hedge currency exposure. Additionally, many US funds tend to have less exposure to foreign securities as a percentage of their total portfolio versus overseas funds.

He cautioned that US institutional investors may need to increase their focus on managing currency risk as their portfolios become increasingly diversified geographically. In time the US also could lose its reserve currency status, which would make FX risk a more pressing concern.